Exploring the Causes of Accounting Restatements by Family Firms

Prior research shows that family firms have better earnings quality than non‐family firms in common‐law countries and highly developed markets. In contrast, we do not find a significant difference in the financial reporting quality between family and non‐family firms in the context of a civil‐law system and less developed market. We show that the financial reporting quality of family firms is conditioned on: (1) the divergence between the controlling shareholders’ voting rights and their cash flow rights, and (2) the firm's reputation for integrity, while these two conditions do not explain the restatement likelihood for non‐family firms. Moreover, when accounting irregularities are detected in the case of family firms, they are associated with more serious accounting restatements. Together, these results imply that the severity of the conflict between ultimate and minority shareholders, and a lack of integrity, explain the propensity for making financial restatements among family firms in a regime characterized as having weak investor protection and concentrated ownership structures.     

The effects of corporate acquisitions on CEO compensation and CEO turnover of family firms

This paper investigates the impact of corporate acquisitions on CEO compensation and CEO turnover of family firms in Continental Europe. We find that CEOs in family firms do not experience an increase in their compensation during the post-acquisition period, while there is a positive and statistically significant association between the compensation of CEOs in non-family firms and their acquisition activity. This finding is consistent with the view that controlling family shareholders provide monitoring for CEOs mitigating managerial agency problems that arise from the separation of ownership and control. Further, we find that the likelihood of CEO turnover declines following an acquisition in non-family firms, suggesting that these acquiring CEOs do not face a higher likelihood of dismissal while they receive a higher level of compensation. In contrast, there is no significant impact of acquisitions on CEO turnover in family firms.     

Earnings Quality Effect on Corporate Excess Cash Holdings and Their Marginal Value

By using panel data from Korea’s listed firms, we find that firms with poor earnings quality are more likely to accumulate excess cash holdings, perhaps in an attempt to buffer themselves from information asymmetry problems. We also find that firms with poor earnings quality are more likely to discount the marginal value of their excess cash holdings because their shareholders appear to question the reason for such cash policy changes from the agency theory perspective. Overall, our results suggest that information asymmetry and agency problems are likely to co-exist in firms with poor earnings quality.     

Evidence on the role of accounting conservatism in monitoring managers’ investment decisions

Watts (2003), among others, argues that conservatism helps in corporate governance by mitigating agency problems associated with managers’ investment decisions. We hypothesize that if conservatism reduces managers’ex ante incentives to take on negative net present value projects and improves the ex post monitoring of investments, firms with more conservative accounting ought to have higher future profitability and lower likelihood (and magnitude) of future special items charges. Consistent with this expectation, we find that firms with more conservative accounting have (i) higher future cash flows and gross margins and (ii) lower likelihood and magnitude of special items charges than firms with less conservative accounting.     

Multiple Large Shareholders and Financial Reporting Quality: Evidence from China

In this paper, we examine the effect of multiple large shareholders (MLS) on financial reporting quality. Using a sample of Chinese listed firms over the period 2007–2018, we find that firms with MLS tend to have lower financial reporting quality. Our findings are robust to an array of robustness tests, including controlling for possible omitted variables, a Heckman two-step sample selection model, and a difference-in-differences analysis based on a propensity score matched sample. We further show that the effect of MLS on financial reporting quality is attenuated for firms followed by more analysts, cross-listed on the Hong Kong Stock Exchange, and held by institutional blockholders. Finally, we find that agency problems appear to be the possible underlying mechanisms through which MLS lower financial reporting quality.     

Investment and financing decisions of private and public firms

We examine differences in the allocation of cash flow between Western European private and public firms. Public firms have a higher investment‐cash flow sensitivity than comparable private firms. This difference is not attributable to more severe financing constraints of public firms. Instead, because differences in investment‐cash flow sensitivities are only observed for the unexpected portion of firms’ cash flow, the empirical evidence supports an agency‐based explanation. Similar patterns are observable for the expected and unexpected portion of firms’ shareholder distributions. Our results are driven by firms from countries with low ownership concentration and more liquid stock markets, where shareholders have lower incentives to monitor. The results are also more pronounced for public firms with low industry Tobin's q and high free cash flow, which are more prone to suffer from agency problems.     

Agency Costs and the Short‐Run Stock Price Response to Capital Expenditures

We estimate the short‐run stock price response to unanticipated capital expenditures. We use association study methodology to avoid the self‐selection bias in event studies and to facilitate construction of a large sample of firm‐years likely to exhibit agency problems. We find that the average price response to routine capital expenditures is negative, and that commonly used agency cost measures explain fully the negative response. Subsample results support the conclusion that the market is skeptical of cash flow financed spending by low‐q firms and even capital spending by high‐q firms when the firm is large and q is only marginally high.     

Labor Union Effect on Corporate Cash Holdings and Their Marginal Value

By using panel data from Korean listed firms, we find that unionized firms strategically hold less cash to enhance their bargaining power against labor unions. We also find that unionized firms are likely to reduce the marginal value of their cash holdings, thereby decreasing shareholder value from the agency theory perspective. This finding complements the agency theory argument that managers tend to waste corporate resources by hoarding cash, particularly when faced with increased information asymmetry and financial constraints. Overall, our results suggest that information-related financial constraints and agency problems are likely to co-exist in unionized firms.     

Can differences in the background characteristics of the chairperson–CEO vertical dyad reduce management agency costs?—A perspective Based on the internal configuration of the top management team

We test whether differences in the background characteristics of firms’ chairperson and CEO can reduce management agency costs. We find that when the chairperson is older, has a higher level of education, and has more overseas experience than the CEO, the management agency costs will be lower. A series of robustness tests do not change our conclusions. In further analysis, we find that the negative relationship between the two is more significant for SOEs or firms experiencing fierce market competition. Finally, we also find that the chairman-CEO’s vertical dyad background characteristics differences can help to improve firm performance. Our study provides theoretical and practical implications for companies on how to best configure their top management team.     

Does debt capacity matter in the choice of debt in reducing the underinvestment problem?

We test the impact of debt capacity on firms’ simultaneous decisions of leverage and debt maturity in reducing underinvestment problems. Examining 24 OECD countries for the period between 1990 and 2011, we find strong evidence, that, unlike previous studies, the role of leverage and debt maturity in reducing underinvestment problems is not homogeneous across firms with varied debt capacity. We find new evidence that, when firms face lower debt capacity constraints, they benefit from their ability to use a greater amount of debt if they shorten their debt maturity, or gain from using longer maturity of debt if they decrease their leverage to reduce underinvestment problems. Our results suggest that they also benefit from the ability of their firms to gain from interest tax shields by financing more with debt or long-term debt, and hence use debt maturity and leverage as strategies substitutes. However, when firms are constrained by concerns over debt capacity, they tend to opt for a lower level of debt that is mainly short-term to reduce the underinvestment problem. Our results suggest that firms with lower debt capacity cannot completely resolve their underinvestment problems by using short-term debt or low leverage, implying that the effects of the liquidity risk outweigh those of underinvestment problems, and hence impose a constraint on firms’ choice of debt.     

Bribe payments under regulatory decentralization: Evidence from rights offering regulations in China

This paper investigates why and how firms’ bribe payments vary as a result of the interaction between firms and local public officials under the decentralized regulatory system for rights offerings implemented prior to 2001 in China. Using the gap between the estimated and reported total direct costs of rights offerings as a measure of firms’ bribes payments in the process of rights offering applications under this system, we find that bribe payments are positively related to local governments’ control rights, firms’ opportunity costs of refusing to pay bribes, and the severity of firms’ Jensen agency problems. We further show that after termination of the regulatory system, firms’ bribe payments are substantially reduced, and local governments’ control rights as well as the severity of firms’ Jensen agency problems can no longer explain the variation in bribe payments.     

The robustness of the Sarbanes Oxley effect on the U.S. capital market

We examine the incidence of new listings and delistings on U.S. stock exchanges and firms’ propensity to delist, as a function of general market conditions, firm fundamentals, and the costs of compliance with the Sarbanes Oxley Act (SOX). We find that both general market conditions and firm fundamentals explain the delisting incidence and firms’ delisting decisions; while SOX variables are positively associated with firms’ delisting likelihood only when general market conditions are not included in the analyses. Further analyses on the population partitioned into size quintiles suggest that the passage of SOX was not associated with an increase in the likelihood of delisting for any size quintile of firms and that the implementation of SOX section 404 is positively associated with the delisting likelihood for midsized and larger firms. Our empirical evidence is useful to regulators as they consider changes in the imposition and implementation of SOX section 404.     

Bank Finance versus Bond Finance

We present a model with agency costs where heterogeneous firms raise finance through either bank loans or corporate bonds and where banks are more efficient than the market in resolving informational problems. We document some major long‐run differences in corporate finance between the United States and the euro area, and show that our model can explain those differences based on information availability. The model fits the data best when the euro area is characterized by lower availability of public information about corporate credit risk relative to the United States, and when European firms value more than United States firms banks’ flexibility and information acquisition role.     

The Role of Dividends, Debt and Board Structure in the Governance of Family Controlled Firms

Abstract:  We investigate whether family controlled firms use dividends, debt and board structure to exacerbate or mitigate agency problems between controlling and minority shareholders in a capital market environment with high investor protection and private benefits of control. Results indicate family controlled firms employ higher dividend payout ratios, higher debt levels and lower levels of board independence compared to non-family firms. This suggests family controlled firms use either dividends or debt as a substitute for independent directors. We also find that dividends and debt are more effective governance mechanisms in mitigating the families' expropriation of minority shareholders' wealth. Independent directors are, in contrast, more effective in controlling owner-manager conflict in non-family firms.     

Corporate Governance and Capital Structure Dynamics

We develop a dynamic tradeoff model to examine the importance of manager–shareholder conflicts in capital structure choice. In the model, firms face taxation, refinancing costs, and liquidation costs. Managers own a fraction of the firms’ equity, capture part of the free cash flow to equity as private benefits, and have control over financing decisions. Using data on leverage choices and the model's predictions for different statistical moments of leverage, we find that agency costs of 1.5% of equity value on average are sufficient to resolve the low‐leverage puzzle and to explain the dynamics of leverage ratios. Our estimates also reveal that agency costs vary significantly across firms and correlate with commonly used proxies for corporate governance.     

The role of board independence in mitigating agency problem II in Australian family firms

We investigate the impact of board independence on earnings management on a sample of family controlled firms listed on the Australian Securities Exchange (ASX). Using panel data over the period 2000–2004, we find evidence of earnings management among family controlled firms in Australia, an environment of high investor protection and private benefits of control. Findings show that a higher proportion of independent directors on boards is effective in reducing earnings management, thereby mitigating agency problems associated with entrenchment and expropriation in family firms. We also find that managers of family firms are less aggressive in managing earnings via discretionary long-term accruals compared to non-family firms.     

Dual agency problems in family firms: Evidence from director elections

We use director elections to analyze outsider shareholder perspectives of agency problems in family firms. Compared to nonfamily firms, outsider shareholders in family firms provide weaker support for director slates proposed by the firms’ nominating committees. Outside shareholder support decreases when families receive private benefits of control, when family members serve in leadership roles, or when family members serve on board monitoring committees. We do not find similar results for other actively engaged concentrated owners. Our results provide new insights into outsider shareholders’ satisfaction with family control in publicly held firms and their perceptions of the family-outsider agency conflicts.     

Institutions and Capital Structure: The Case of Chinese Property Firms

Different institutional features have been found to affect capital structure decisions, but their connections to corporate finance theories are not always clear. This study aims to assess the predictive power of the agency and pecking order theories in two distinct information environments. The strategy is to compare two similar groups of property firms listed on the Mainland and Hong Kong stock exchanges respectively. Both groups operate in the Mainland property market and are subject to the same tax code, but the degrees of transparency and integrity of the stock markets are weaker for the Mainland-listed firms. We find that factors related to agency conflicts and information asymmetries exert a stronger influence on the capital structure decisions of Mainland-listed firms than on those of the Hong Kong-listed firms. This is confirmed by a test of the agency theory using such corporate governance factors as managerial shareholding and shareholding concentration and by a test of the pecking order theory using an error correction model. A further test on the increments of R-squared in the regression models shows that variables derived from the two theories better explain the variations of the capital structure of Mainland-listed firms than those of Hong Kong-listed firms.     

Agency costs of free cash flow and conditional conservatism

This study investigates whether agency costs of free cash flow (FCF) are associated with conditional conservatism. Prior research documents that conditional conservatism improves ex ante efficient investment decisions and facilitates ex post monitoring of managers’ investment decisions. As conditional conservatism can provide protection from possible managerial expropriation, the demand for conditional conservatism should increase with the agency costs of FCF. Using excess cash as a proxy for the agency costs of FCF, I provide evidence that firms with higher agency costs of FCF incorporate losses in a timelier manner relative to gains compared to their counterparts. Additionally, the association between excess cash and conditional conservatism predictably varies with the presence of alternative monitoring mechanisms that mitigate FCF problems, such as debt or dividend payouts or repurchases. Further investigation suggests that greater conservatism is associated with a lower likelihood of overinvestment among firms bearing high agency costs of FCF, demonstrating the ability of conservatism to reduce agency costs of FCF.     

Does geography matter? Firm location and corporate payout policy

We investigate the impact of geography on agency costs and firm dividend policies. We argue that remote firm location increases the cost of shareholder oversight of managerial investment decisions. We hypothesize that remotely located firms facing free cash flow problems precommit to higher dividends to mitigate agency conflicts. We find that remotely located firms pay higher dividends. As expected, the effect of geography on dividends is most pronounced for firms with severe free cash flow problems. Further, remotely located firms rely more on regular dividends instead of special dividends or share repurchases and decrease dividends less often.